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Gregory Mankiw, chairman of the President’s Council of Economic Advisers, has been flayed for his “gaffe” about outsourcing. Here is what he said:

“The gains from trade that take place over the Internet or telephone lines are no different than the gains from trade in physical goods transported by ship or plane. When a good or service is produced at lower cost in another country, it makes sense to import it rather than produce it domestically. This allows the United States to devote its resources to more productive purposes.”

That’s the economics I learned. It seems to make sense, too. Consider the following case:

Now suppose the American B switches his business to the Indian C, who creates the same software for $25,000. What has happened? Well, A has lost his job. And as long as A is out of work, there is a net loss to the American economy. But most people displaced do find work. Assume that A cannot find another $100,000 job, but finds one at $60,000. Here are the gains and losses for A, B, and C:

A, the American producer: -$40,000
B, the American consumer: +$75,000
C, the Indian producer: +$10,000
The net gain is $45,000, of which $35,000 is in the United States.

These are all made-up numbers. You can make up different ones. But if you assume the American gets another job, it’s pretty difficult to come up with a net loss for the United States-and the lower the wage level of our trading partner, the more difficult it is for America to come out behind.

None of this reasoning makes the process any kinder to A. But let us not forget B and C. They gain from trade more than A loses.